Making each vote count

Transparency. Oversight. Governance. One could argue that these three themes are dominating the evolution of the investment management sector worldwide. And in the context of proxy voting, all are highly relevant.

The integrity of the shareholder voting process in Canada has come under greater scrutiny in recent months, and there is a groundswell of support for further assessment, and change.

According to a research paper released by Davies Ward Phillips & Vineberg LLP, ‘The Quality of the Shareholder Vote in Canada’, the current proxy voting system has a number of drawbacks including systemic challenges, potential for over voting, lack of transparency and limited regulatory oversight—to name but a few.

Strategic direction

An inefficient, ineffective system can have dramatic consequences, particularly given what might be at stake at a shareholders meeting. For example, meeting agendas may include voting on structural changes, mergers and acquisitions, new directors—all of which dictate the company’s strategic direction for the future. Stakeholders and shareholders need to have confidence in the integrity of the voting process. It’s not just about the quantity of votes received, but the quality.

So, what needs to be addressed? There were several key areas highlighted in the paper, which was made available for public comment and discussion.

Proxy voting is a complex process that involves multiple participants and third-party providers. But a clear articulation of the end-to-end process does not currently exist. To bridge that gap, the paper strongly encourages the development of a regulatory task force, charged with conducting a full process audit. Once that is in hand a more detailed assessment can be undertaken to identify information roadblocks, technological inconsistencies and other process issues, while also serving to reveal elements that are currently working successfully.

The paper also introduced securities lending as a discussion point, the focus being on the potential for shares to be voted twice—by both lender and borrower. However, RBC Dexia employs safeguards that protect against the possibility of double voting, as well as options that enable owners to participate in securities lending programs while retaining the option to vote.

First, contrary to the position tabled in the paper, the lists extracted by RBC Dexia to confirm proxy voting entitlements, do not include securities on loan.

Second, for those securities lending participants that opt to exercise their voting privileges, the lending agent (e.g., RBC Dexia) will recall the securities on loan in order to return the securities to the beneficial owner’s account prior to the record date, thus providing the beneficial owner with the ability to vote their shares. The right to recall any security on loan at any time is clearly articulated in the legal contracts. It is the beneficial owners right to exercise this option if they so desire. The decision to vote does not rest with the securities lending provider or borrower.

Market participants should not have to alter their investment strategies or sacrifice corporate governance to accommodate securities lending, regardless of program type or structure. It is incumbent on each firm to work with their provider and design their own specific guidelines regarding corporate governance as it relates to proxy voting, with an understanding of any implications this may have to their lending program. The value of a particular vote is determined by the owner of that vote. Some may only vote when the issue is contentious while others may vote on every issue.

Disclose identities

The current regulatory environment governing proxy voting, in both Canada and the US, can pose challenges. First, investors can elect to be ‘Objecting Beneficial Owners’ (OBOs), whereby their identities cannot be disclosed to the issuer. While an acceptable and legal practice, it limits the ability of issuers to communicate directly with OBOs, adding a layer of complexity to the flow of information.

Second, not all proxy voting participants are subject to regulatory oversight. For example, one of the leading names in the industry for proxy voting services which, according to the report, is the proxy agent for most Canadian intermediaries, is not regulated. While they are committed to investing in solutions to ensure process integrity and transparency, the report suggests that regulators should play a more active role in integrating all participants.

Reform efforts

The Canadian Securities Administrators (CSA) have made some headway and proposed amendments to National Instrument 54-101, Communication with Beneficial Owners of Securities of a Reporting Issuer. Under their ‘notice-and-access’ model, issuers would have the option of posting proxy-related materials on a non-SEDAR website designed to improve communication and overall process efficiency. Taking steps to minimize paper-based distribution of materials is an approach supported by the Davies Ward Phillips & Vineberg paper, but still leaves room for improvement.

And in support of greater transparency, the CSA proposals also require greater disclosure in management information circulars, in specific circumstances. But given the variety of conditions, it may provide for differential treatment of shareholders.

With a greater number of market participants expressing both concern and interest in the current proxy voting process, there is an expectation of change. But who leads that challenge is still an open question.

Kathy Byles
Director, Compliance Americas
RBC Dexia Investor Services

Yvonne Wyllie
Head, Securities Lending
Market Products & Services
RBC Dexia Investor Services

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